Saturday, 4 April 2015

How can Labour say it didn't crash the economy

If my memory serves me correctly, one of the rounds of applause
received in the UK election debate on Thursday was when Clegg said that
Miliband should have apologised for crashing the economy when they were in
office. That suggests that a significant number of people (I suspect not
including Nick Clegg, but that may be optimistic) think it is true that Labour
should apologise for crashing the economy. Are they right?

You can see why they might think this, because much of the
press keeps saying they did. In addition, the more non-partisan parts of
mediamacro hardly ever challenge members of the governing parties when they
make the claim that Labour crashed the economy.

The difficulty here is that ‘Labour crashed the economy’ is not
complete fiction. If the accusation was that Labour crashed the economy through
fiscal profligacy (which it sometimes is), that is a straightforward falsehood,
and it is easy to show it is a lie. The economy crashed because of the global
financial crisis. But if fiscal profligacy is not mentioned, the claim cannot
be dismissed as completely wrong. This is because the Labour government, like
their Conservative predecessors, brought about or tolerated a regulation regime
and a financial sector that allowed the global financial crisis to have a
particularly damaging effect on the UK economy.

That is I guess why Ed Miliband seemed to respond to this
accusation by saying something like: “yes we did get financial regulation
wrong, but …”. That may be an honest reply, but it is not very effective,
because many will read it as admitting Labour caused the recession. A better
reply would be: “everyone knows that the recession was caused by the global
financial crisis and insufficient regulation, but the recession would have been
worse if the Conservatives had been in power.” As Mervyn King says “the real problem was a shared
intellectual view right across the entire political spectrum and shared across
the financial markets that things were going pretty well”, a view which he of
course shared. I think the claim that the recession would have been worse if
the Conservatives had been in government can be justified on two grounds.
First, the Conservatives did accuse Labour of too much financial
regulation, not too little. Second, they were against Labour’s fiscal stimulus
in 2009.

Why is it important that Labour combat this charge effectively?
Because it seems to me, being as impartial as I can be, that when it comes to a
contest of macroeconomic competence between the last Labour government and the
current coalition, Labour wins hands down. That is not so much because Labour
were so good (although they got some important things right, like not joining
the Eurozone, setting up the Monetary Policy Committee, and fiscal stimulus in
2009), or because the coalition has been all bad (setting up the OBR was
clearly a positive move). It is because the coalition made such a bad mistake
with austerity, a mistake that very many warned them about. Losing the
equivalent of at least £4,000 per household is a big deal, with no obvious
equivalent in my professional lifetime. Even if we were prepared to forgive
this as a genuine mistake, to plan to make exactly the same mistake again
either suggests a complete inability to learn, complete incompetence, or a
duplicitous pursuit of ideology over social welfare.

On a more positive note, if you want a detailed assessment of
the coalition’s record on a whole range of economic issues, look both here and at the Coalition Economics website.
The latter is by the same team that made an assessment of economic policy under
Labour for the Oxford Review, and that issue is also available on the website,
so even if the authors do not make an explicit comparison between the two
governments, you have the information to do so. Some excellent articles are
already there (including one on financial regulation), and more are to follow.

This claim is the same as the presentation Friedman later gave to his book with Schwartz, which Krugman glossed by saying:

"The Fed could and should do more — but it’s a much harder job than Friedman and Schwartz suggested. Beyond that, however, Friedman in his role as political advocate committed a serious sin; he consistently misrepresented his own economic work. What he had really shown, or thought he had shown, was that the Fed could have prevented the Depression; but he transmuted this into a claim that the Fed caused the Depression. And this debased and misleading version is what has filtered down to the likes of Ron Paul, who then use it to argue against the very activism Friedman was really advocating" (May 1, 2012 'Milton’s Paradise Lost').

That Osborne quote from the Times February 23, 2006:

“In Ireland they understand this. They have freed their markets, developed the skills of their workforce, encouraged enterprise and innovation and created a dynamic economy. They have much to teach us, if only we are willing to learn.”

Why is it Clegg and his Limbo Democrats have been unable to say since 2008 that the crash was a failure of free markets to right themselves, and instead have insisted on blaming 'government', well, it's as bad a performance as the Liberals managed in the 1930s - and that did Liberalism no good in the long run and neither will this.

Yes Miliband should have turned it around on Clegg and pointed out the epic failure of deregulated free markets. And then he should have pointed out the other conservative governments in power at the time in America, France and Germany.

If I were Miliband my reply would be:Yes we were in power but the public needs to understand that the if the Tories were in power then they would have mismanaged the economy just have they have now. They like to portray the cause as out of control spending, but this was spending they agreed to match. The real cause of the crisis was a poorly regulated financial sector, and everyone and their dog knows that the Tories would be softer on bankers, lighter on regulation, and the crash would have been far worse.Now you can argue we didn't get enough for our money from the bailout, but the way the Tories dithered and doubted about the bailout could have caused a complete failure in the banking system. After the election we handed them a recovery, which they squandered on an ecomically illiterate policy of austerity. They damaged the economy and our standard of living so badly in those first few years they have only just got the back to the position they inherited. Now they proudly promise to repeat the disaster.

It's a little bit scary that some random commenter on a blog (AJ Thomas) can come up with a more coherent and convincing counter-narrative to the lies and misrepresentations that the Tory propaganda machine have been hammering in lockstep for the last five years than anybody in the Labour party has managed.

So basically labour did crash the economy [ but the conservatives would have done so as well ] , but they responded in a way that you personally approve of [ while the conservatives wouldn't have done ] . The problem here is if a financial crisis occurs , some believe the poor are disproportionately affected . The tories can be expected to look after their own . So can labour . That's how politics works . And that's exactly what labour were doing in the run up to the crisis .looking after their own . therefore the lack of financial regulation reveals something about the reality of labour at the time . And if nothing has changed [ which it hasn't ] , the reality of what labour is today . if you read alaister darlings memoir , the first thing the new labour economic team did in 1997 was to inform the treasury that they wanted to reform bank regulation . the treasury civil servants advised against . who was behind this policy ? Did newly business friendly labour , looking to stimulate the economy via banking , go to banking contacts , and seek advice ?what can we do for you ? How can we help you ? was the answer >>> get the bank of England off our backs ? in the u s it is often claimed that banks write detailed legislation . Politicians then pass it .who dreamt up labour s financial services and markets act ? No one i have seen has suggested it was the tories .Are you going to be the first ? labour did not reign in northern rock .labour did not stop the rbs acquisition of abn Amro . but everyone thought things were going great . everyone being the tories , the civil service working under labour guidelines , and clueless labour no hopers . what would have happened if labour had listened to dissenters about northern rock + rbs ? [ note . according to you none existed ]could intervention have taken place , without changing the whole banking [ light touch policy ] ? almost certainly not . To save the u k banking system labour would have needed a new policy . was , or is it , the type of party capable of changing course in such a radical way ? no .is labour responsible for not protecting the British banking system , and therefore the British economy ? yes . this is really not rocket science .if i were you i would stick to the macro stuff . labour s goose is cooked . Like the dodo , its economic credibility is dead . pre crisis labour was a p c party .gender , race , sexual preference .it still is today .i don't see a credible economic policy . And your arguments , in a t v studio , would easily be counted by most tory m p s . labour is going no where . Nothing has changed . nice try though .

Clegg was telling Miliband to apologise for what was done. That is a backwards looking exercise, dependent upon responsibility for past events.

You either misunderstand or ignore how responsibility works.

If you are punched in the face, who do you blame for the resultant broken nose? The person who punched you, or the person who would have punched you if the first had not.

It is just neither here nor there for purposes of attributing responsibility to say "the Tories would have done the same or worse." So what? They just didn't.

This argument cuts both ways of course. The UK's fiscal path from 2010 onwards looks very similar to the Darling plan. Darling said "cuts worse than Thatcher" were coming whoever won. The same political imperative to frontload cuts would have been faced by any Labour government. The balance of cuts and tax increases may have been different, but the overall difference would have been marginal.

So, when we bemoan the impact of 'austerity' we should not (as you like to do) select a hypothetical world that could never have actually occurred as our comparator, but instead the slightly different one that could have.

But, in terms of attributing responsiblity for "austerity" the fact that Labour would not have behaved much differently is neither here nor there. Again, so what?

There is, I think, a difficult question of how we should allow responsibility for past actions determine our votes.

Should we adopt the remorseless forward looking utilitarian outlook of the economist? Should we ignore how parties have behaved in the past, and cast our votes solely based upon a calculation as to how they will behave in the future (a judgement guided by but not determined by past conduct)?

If a party is responsible for the worst foreign policy disaster since WW2 and the regulatory failure that caused the impact of the crash in the UK to be far worse than elsewhere, do we ignore that if we think they won't make the same mistakes again?

I do not think this is a difficult question at all. Go back to 2010. Labour were voted out because they were 'responsible', even though the Conservatives would have been even worse if they had been in power. So what did this approach of punishing those responsible achieve? A cost of at least £4000 per household. The idea that Labour would have been just as bad if they had stayed in power is highly implausible.

Besides, attributing blame in this case is not just an exercise in asking someone to take responsibility. It is being made as part of an argument that the other side was somehow *more* qualified to lead the economy because they wouldn't have made those mistakes.

We'll never know if the Tories would have made those mistakes. Does light regulation of banks necessarily translate to it being totally incompetent? How on earth was RBS allowed to complete the catastrophic ABN Amro deal?

Spinning H asks: "Should we adopt the remorseless forward looking utilitarian outlook of the economist? Should we ignore how parties have behaved in the past, and cast our votes solely based upon a calculation as to how they will behave in the future (a judgement guided by but not determined by past conduct)?"If a party is responsible for the worst foreign policy disaster since WW2 and the regulatory failure that caused the impact of the crash in the UK to be far worse than elsewhere, do we ignore that if we think they won't make the same mistakes again?"

Er, yes and yes. If we believe based on weighing the information we have that the policies they will pursue will be the best for the people of the country. Economics is not a morality play, as Paul Krugman frequently reminds us.

Of course you don't think it a difficult question. That is the utilitarian answer, as I said. That is the point of saying economics is not a morality tale. It is a remorselessly forward looking discipline, unconcerned with how people behaved in the past (save as a guide to the future).

That is why you put responsibility in scare quotes, and why your criticism of Clegg misses the mark.

Labour were in government from 1997. Plenty of opportunity to reform financial services. As you so often say about media macro - that all sign up to the mistaken view is no excuse? Labour continue to sign up to misguided Tory policies such as allowing access to private pension pots, rather than offering an alternative such as long term state guaranteed annuity rates. After all the state's cost of capital and ability to spread financial risk dwarfs any insurance company as we found out in the crash. As Blair drew a line with New Labour, the current party needs to do the same; hard whilst everytime Balls speaks I think of no more boom and bust then bust - however, harsh that is.

«Labour were in government from 1997. Plenty of opportunity to reform financial services. [ ... ] Labour continue to sign up to misguided Tory policies such as allowing access to private pension pots,»

Because swing voters in South East marginal regard themselves as financial speculators first, and workers second (and many of them are pure rentiers, being often middle aged or older divorced or widowed property owning women, or having otherwise jobs they regard as safe). As I mentioned in another comment financial speculation on property has generated 150% per *year* gross returns for 20-30 years for those rentiers, and they absolutely love it. Do you realize how big it is? I don't think that even the heroin trade has produced 150% annual returns for decades, never mind for the millions of people (mostly middle aged and older women) who own a property (or several) in London or the South East that was bought in the 1990s or 1980s or earlier when property prices were more like 2.5 times single earner incomes, instead of 10 times or more two earner incomes...

Both Labour and the Conservatives think that those rentier swing voters in South East marginal seats are the only voters that decide elections, so they will promise anything to get their vote. Just about every policy that George Osborne has come up with is strictly targeted at buying their votes with more, bigger tax-free capital gains.

It is a long standing debate about "Southern discomfort" and people like Cruddas have argued in the Labour party against basing their electoral strategy on the same voters that the Tory fight over, and indeed while New Labour pursued them hard with all that talk of "aspiration", at least this current Labour leadership is simply leaving them alone.

«the state's cost of capital and ability to spread financial risk dwarfs any insurance company as we found out in the crash»

Actually what "we found out in the crash" is that the *Bank of England* has those advantages, as long as the inflationary implications are countered by ferocious fiscal austerity that pushes down median wages by 20-25% in real terms and the pound also goes down by the same amount. As George Osborne said: «A credible fiscal plan allows you to have a looser monetary policy than would otherwise be the case. My approach is to be fiscally conservative but monetarily active.»

He is just a pusher of "housing market heroin" as someone wrote:

http://www.theguardian.com/commentisfree/2013/mar/25/george-osborne-britons-economic-cannon-fodder«This is what the political economist Colin Crouch has dubbed "privatised Keynesianism": debt is used to reflate the economy, but it is taken on not by the public sector but by individuals, couples, families. Privatised Keynesianism sounds a bit joyless, but the political classes found something to give it extra zap. Call it housing-market heroin: the special high the Brits get when property prices are really taking off and Sarah Beeny is on the telly explaining how we can all cash in. Thatcher was the first PM to really push housing-market heroin with her right-to-buy programme and her Lawson boom but, with their love of aspiration and Home Ownership Task Force, Blair and Brown knew its potency, too.»

At least Milliband and Balls are no longer pushing "housing market heroin" but they are not against it, to avoid antagonizing those swing voters in South East marginal seats.

We can't separate economics from political expediency here. Labour (rightly) tried to allay the fears of a broadly conservative electorate (small c), fed their information by a broadly Conservative media. They did this, partly by openly moving regulatory powers to a supposedly independent body - Bank of England, interest rate management - and partly by trusting the financial sector to deliver self-regulation. It was on the latter element that Brown and Balls failed so drastically. We simply cannot trust the most powerful forces in society to regulate their own behaviour: they won't, and history proves this repeatedly.

«and partly by trusting the financial sector to deliver self-regulation. It was on the latter element that Brown and Balls failed so drastically.»

No, no, I am pretty sure that Brown and *Blair* trusted the financial sector to deliver *too little* self regulation, they were not stupid, it was part of their strategy to win elections.

There are two stories here that have running in the UK (and other anglo-american culture countries) for decades in the circles of power (just read The Economist for the conventional wisdom):

* The less important story is that as the UK agriculture and manufacturing employment and profitability were falling the hope for prosperity for the future was *financial services* and in particular the success of ever-bigger "national champions" in financial services. Therefore the governments tried to subsidize massively their national champions in financial services via extremely low cost of funding (implicit state guarantees, explicit low cost loans) and regulatory relaxation and to make them merge to create ever bigger financial conglomerates, again with regulatory relaxation. The name of the game became for decades that the country whose finance national champions were allowed or even encouraged to have the biggest leverage ratios wrt capital would win, and that meant ever looser monetary policy and accounting and financial regulations. The financial sector got from the Tories and New Labour what they wanted, trading with leverage up to 50-100 times capital, and even infinite times capital as many huge financial companies speculated (and continue to speculate today) while having zero or negative net capital. Employment in financial services boomed spectacularly in the UK, with 30-50% of new jobs being in the financial sector (in particular estate agents, but also saving and pension salespeople) for many years.

* "Aspirational" swing voters decide elections in marginal seats, and they "aspire" to just one thing: bigger house valuations with cheaper remortgages. Bigger house prices are created by debt booms, as more debt pushes up houses prices, and higher house prices allow for more debt as they are collateral for the bigger debts. Debt booms are created also by tight fiscal policy and loose monetary policy, but most importantly by loose accounting and financial regulations. Affluent "aspirational" voters got from the Tories and New Labour what they wanted: 100-200% gross returns on highly leveraged property speculation, as a small house bought with a £5-10k deposit and a £100k mortgage in 2001 ballooned in valuation to £220k in 2011, for a gross annual tax-free or low tax profit (entirely at the expense of poorer people) of over 10k per year, plus (taxable) rent or rent-equivalent benefits. People who bought property before 2000 on 5% (20 times leverage) down mortgages made immense profits, and effectively got the property for free, as the valuation more than doubled.

New Labour was really into that, both ways (like the governments of Ireland, Australia, USA, Iceland, Spain, Latvia, ...) as SimonWL hints partially when he says «the Labour government, like their Conservative predecessors, brought about or tolerated a regulation regime and a financial sector that allowed the global financial crisis to have a particularly damaging effect on the UK economy». I am sure that the Tories would probably have done much worse, but that's a counterfactual to prove.

«Employment in financial services boomed spectacularly in the UK, with 30-50% of new jobs being in the financial sector»

Those were *relatively* low paid, low security jobs in the *retail* financial services; as to jobs in the wholesale financial core in the City an editorialist at The Economist wrote recently as to attempts to lower leverage ratios and tighten regulations of the "national champions" in the City:

www.economist.com/node/21542417«Britain will one day wake up to discover that it has lost one of the world's most successful business clusters, and the best hope the next generation has of earning a decent living.»

implying that in the near future the only chance of "earning a decent living" in the UK will be to get one of a few dozen thousand (at most) elite jobs in the City with the rest of the country being a reservoir of cheap hired help for the winners (obviously drawn mostly from the "best and brightest" coming from "independent schools").

Herewith a possible pro-austerity argument. Inflation during the early years of the crisis (around 2007-10) inflation was well above the 2% target, ergo more stimulus was not possible. The Bank of England DID RECOGNISE that a significant part of that inflation was cost push, and thus allowed more stimulus than had it thought that inflation was just demand pull. But (if the judgement of the BoE was correct) then further stimulus would not have been possible.

And now I’ll take cover with a view to avoiding being injured by brickbats...:-)

You are a bit late, Ralph. Market monetarists have used this argument. The idea is fine in principle, but not in practice because

(a) BoE were clearly not achieving their target in 2010, so they would not have raised rates if growth had been higher(b) austerity pushed up inflation through higher VAT(c) OBR impact assessment of austerity implicitly allows for some monetary offset(d) Osborne did not know that inflation would rise in June 2010, so no excuse for a very bad policy decision.

So Labour did crash the economy, but the Conservatives would have done it even more badly, so - so what? Labour did crash the economy. Anyone who thinks a counterfactual has more weight than reality is a fool.

And to talk of a "global financial crisis" as the culprit is a laugh. The UK was the leader in the global financial crisis, even in front of the US if that could at all be possible.

To be fair, Labor deserves blame for allowing deregulated banks (plus the populace) create a housing bubble, which was unhealthy for the economy. To dodge this bullet requires a willingness to deny reality, a basic part of a politican's repetoire. The best that Labor can argue is that the Tories mishandled the "recovery" and the poor pains in wages and productivity are good targets, but at the end of the day (post), I am not sanguine about the ability of the British public to understand these points.

The electorate here in the states just looks at the last months of data and is amnestic about what happened a few years ago. Lots of depressing research has been done on this phenomenon.

So I'm not sure it's useful to blame Labour. At least, not if anyone is suggesting Labour should be singled out for special blame.

Obviously you're right - it happened on their watch, while they were responsible. But there's more to responsibility than finger pointing. More useful would be to ask 'what are you going to do about it?' - if the answer is 'oh, blame Labour', I'd say that would be a sign someone wasn't taking the issue seriously.

Traditional lefties were probably cross that Labour was so chummy with the banks at the expense of other, more traditionally labouresque areas of the economy. But otherwise there was very little criticism (at least of the sort that would have been helpful) - the prevailing winds and dominant political theory throughout the no-liberal world were for light regulation and market friendly solutions - and that smart methodology in banks and government made boom and bust a thing of the past.

If people had said at the time 'actually, you need to watch out for, and do something about these particular issues' - then they'd have a point - blaming labour would make sense. But they didn't.

If all one ends up doing is scapegoating Labour - while leaving everything else unreformed, you've not done much good.

i am involved in the bond industry in the US, and I am aware that both democrats and republicans have some blame. But Bush and his party deserve extra blame as it happened on their watch. Worry about a theoretical bubble is worrisome; doing nothing about an actual one is heinous.

So I suppose I think the context is a probably a bit more international than that... but anyway. ....So you blame it on Bush and Co. and then worry about it no more?

I suppose if you're confident in the other team, that approach might be okay. But to be sure, in the UK we've a choice between Team A who presided while 2007/2008 happened and Team B who'd have done the same if not worse, oh and who thought it might be a good idea to gamble the economic well-being of the entire Kingdom (hey, at least it was only 3 countries) on a single, unpublished, unpeer-reviewed and wildly controversial study... and (who'd of thunk) lost.

Which brand of negligence do you think it would be most useful for us to go with?

Seems to me that finger pointing only goes so far. And not very far at that.

The issue is surely not that Labour didn't crash the economy, both the Tories and Lib dems would not have killed the goose that laid the golden eggs. It was that from 2002 to 2007 it was spending heavily when it should have been creating reserves. By the time the crash came, the government had already been running a deficit and borrowing so there really wasn't anywhere to go in terms of putting in proper Keynesian impetus measures as the cupboard was bare.

total managed expenditure (TME) averaged 39.3% of GDP per year during the five years 2002/03 to 2006/07 , compared to an average of 40.5% per year over the period 1948/49 to 2006/07.

What is so depressing about this rewriting of readily available data is not the clearly wrong view of @Artie Fufkin, which has no consequence, but the fact that, during the party leaders' TV debate, David Cameron could quote Liam Bryne's "joke" note about there being no money left and say, "That is the truth of what happened", without being heckled off the stage.

The Prime Minister of our country seems to think that the government finances involve a big pot of money which ran out during Labour's last term in office. It is not Ed Miliband who has to apologise.

'Losing the equivalent of at least £4,000 per household is a big deal,'The assumptions behind this figure look a bit, well, silly.It is strange that economists will tell you that money is a means of exchange of value, but then go on to say that they can fix a problem of value (i.e. the goods and services available to the population) by printing money. Silly sods.

The reason we have issues in this country now is because the Blair government did not act like a Labour government, they acted like Tories. Rather than reverse the deregulation enacted under Thatcher, they rode the bubble it created right up until 2007, betraying their core vote in the process. We now have a position where the person in the street can't own a house because they cost too much, an inefficient health service obsessed with managers and targets and an economic system that appears to expect the young to shoulder ever more personal debt in order to shovel cash towards the older demographic.

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